Budget 2016: Do you know what the knowledge box is?

Finance minister, Michael Noonan.

Michael Cogley

More detail on the research and development tax incentive known as the Knowledge Development Box (KDB) is expected in the upcoming Budget 2016 statement.

The KDB is a tax rate for income generated from R&D and intellectual property and is expected to be set in the region of 5pc and 6.25pc.

The initial announcement of the KDB came after the closure of the ‘double Irish’ tax loophole and while he does not see it as a knee-jerk reaction Ken Hardy, tax partner at KPMG believes it is an attempt to keep Ireland’s tax scheme as competitive as possible.

However, other European countries, including Germany, have warned that these incentives should only be used as a reward for R&D investment and not as a tax avoidance tool.

“Minister Noonan did announce his intention to introduce a knowledge development box at the same time as the double-Irish structure was being removed. I’m not saying that it’s hand in glove or knee-jerk but it certainly would be an attempt to respond.

“It is the government trying to ensure the Irish tax regime is as competitive as it can be given recent developments,” Mr Hardy said.

It is expected that the KDB will go live on January 1 of next year and Damien Flanagan of KPMG says that the incentive won’t make a huge difference to ‘brass-plate’ companies.

“It’s not designed for brass-plate companies in Ireland that’s not going to be of any benefit to them; it’s not a tax avoidance strategy. It’s to encourage additional spend in R&D activity,” Mr Flanagan said.

While it may not be of huge interest to multinationals Mr Flanagan said that it will be very interesting to Irish companies.

“There’s 1,500 R&D tax credit claims in Ireland and most of those are indigenous businesses in fact about 80pc of them are indigenous businesses. So that’s a lot of companies doing research and development and if these companies are able to patent their intellectual property (IP) then they will fall in the knowledge development box, so we do see that this is something that will be attractive for Irish businesses.”

Mr Hardy believes that the reach of companies that the development box could reach is quite broad.

“The KDB is agnostic to the industry but the type of companies you would expect to avail of this would be the pharmaceutical, biotech, med device, software, food but it could equally be heavy or light engineering. It really is the broadest cross-section of Irish industry can benefit from the KDB.”

The rate of tax is not yet known but Mr Hardy believes that Ireland will follow a proportionate rate to the UK.

“The devil will be in the detail, there has been an extensive consultation process around this by the department, which we welcome.

“I suppose the big unknown is what is the tax rate that is going to apply to KDB. Is it going to be 5pc? 6.25pc? We expect it’s going to be somewhere in that range,” Mr Hardy said.

Mr Flanagan believes that in the short-term the development box won’t be as competitive as its EU competitors.

“The UK would have a 10pc rate in their patent box which is half of their corporate tax rate which is 20pc. We’re kind of guiding towards half of our corporate tax rate. At a minimum we hope it would be half which is 6.25pc.

“We’re not going to be as competitive as those older regimes in the short-term.”